SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB/A
AMENDMENT TO
ANNUAL REPORT FILED PURSUANT TO SECTION 12, 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File Number
December 31, 1995 1-11065
- ------------------------- -----------------------
ENCON SYSTEMS, INC.
----------------------------------------------
(Name of Small Business Issuer In Its Charter)
Delaware 04-3069270
- ------------------------------- -------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
86 South Street, 01748
- ---------------------------- ----------
Hopkinton, Massachusetts (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number, Including Area Code: (508) 435-7700
---------------
AMENDMENT NO. 1
The undersigned registrant hereby amends the following items, financial
statements, exhibits or other portions of its Annual Report for the fiscal year
ended December 31, 1995 on Form 10-KSB as set forth in the pages attached
hereto:
(List all such items, financial statements, exhibits or
other portions amended.)
1. Part II: Item 7 - Financial Statements
2. Part III: Item 13 - Exhibits and Reports on Form 8-K
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this amendment to be signed on its
behalf by the undersigned, thereunto duly authorized.
ENCON SYSTEMS, INC.
Date: June 11, 1996 By: /s/ Alan L. Freidman
--------------------
Alan L. Freidman
Chief Executive Officer
PART II
ITEM 7. FINANCIAL STATEMENTS.
The following financial statements are filed as part of this report:
Page
Independent Auditors' Reports ........................................... F-2-4
Consolidated Balance Sheets as of December 31, 1995 and 1994 ............ F-6
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 .............................................. F-8
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1994............................................... F-9
Consolidated Statements of Cash Flows for the years ended December
31, 1995 and 1994........................................................ F-10
Notes to Consolidated Financial Statements .............................. F-11
PART III
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
(1) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a* Letter of Intent by and among Kemper Management Services, Inc., the United
Illuminating Company and Precision Power, Inc., dated February 7, 1996.
10b* Lease for premises at 82 Burlews Court, Hackensack, New Jersey.
10c* Lease for premises at 1635 West University Parkway, Sarasota, Florida.
10d* Lease for premises at 107 Oakwood Drive, Glastonbury, Connecticut.
18* Letter on Change in Accounting Principles.
21* List of Subsidiaries of ENCON Systems, Inc.
23a Consent of KPMG Peat Marwick LLP.
23b Consent of Craig J. Delfino, CPA.
23c Consent of Coopers & Lybrand L.L.P.
</TABLE>
- ---------------------
* Previously filed with the Commission on April 16, 1996.
(2) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995 filed
with the Commission on November 20, 1995 and are incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a Commercial Revolving Line of Credit Agreement by and between Shawmut Bank,
N.A. ("Shawmut"), and ENCON Systems, Inc., dated August 15, 1995.
10b Commercial Revolving Line of Credit Promissory Note from ENCON Systems, Inc.
to Shawmut, dated August 15, 1995.
</TABLE>
-2-
(3) The following exhibits were filed as part of the Company's Current
Report on Form 8-K filed with the Commission on January 11, 1995 and are
incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a Share Purchase Agreement by and among ENCON Systems, Inc., 1111567 Ontario
Inc. and Peter Heudier.
10b Share Exchange Agreement by and between ENCON Systems, Inc. and Peter
Heudier.
10c Guarantee of ENCON Systems, Inc.
10d Key Employee Agreement by and between Enera and Peter Heudier.
10f Indemnity Agreement by and among ENCON Systems, Inc., 1111576 Ontario Inc.,
Enera Inc., Peter Heudier and Cathy Heudier.
</TABLE>
(4) The following exhibits were filed as part of the Company's
Post-Effective Amendment No. 1 to its Form SB-2 Registration Statement (No.
33-57556) originally filed with the Securities and Exchange Commission (the
"Commission") on September 6, 1994 and are incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a Agreement between the Company and National Trust Company
("National"), relating to the Lease and Assignment Agreements
between the Company and National, dated December 15, 1993.
10b Agreement between the Company and Texas Utilities Electric Company.
</TABLE>
(5) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1994 filed
with the Commission on November 14, 1994 and are incorporated herein by
reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a Credit Agreement by and between Canadian Imperial Bank of Commerce ("CIBC")
and BFR Industries Ltd.
</TABLE>
-3-
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10b Form of Security Agreement by and between CIBC and Encon Canada Systems Inc.
("Encon Canada").
10c Form of Guarantee from Encon Canada to CIBC.
</TABLE>
(6) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-QSB for the quarter ended June 30, 1994 filed with
the Commission on August 15, 1994 and are incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10c Commercial Term Promissory Note, dated July 20, 1994, by and between the
Company and Shawmut.
10d Commercial Term Loan Agreement, dated July 20, 1994, by and between the
Company and Shawmut.
10e Security Agreement, dated July 20, 1994, by and between the Company and
Shawmut.
10f Corporate Guarantee of Leader Lighting and Energy Services, Inc. ("Leader
Lighting", now Encon Systems Canada, Inc.) to Shawmut.
10g Agreement, dated March 23, 1994, by and between Leader Lighting and Bona
Building and Management Co. Ltd.
</TABLE>
(7) The following exhibit was filed as part of the Company's Form S-3
Registration Statement (No. 33-81822) declared effective by the Commission on
July 29, 1994 and is incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
3a Certificate of Amendment of Certificate of Incorporation, dated May 26, 1994.
</TABLE>
(8) The following exhibits were filed as part of the Company's
Quarterly Report on Form 10-QSB for the quarter ended March 31, 1994 and
Amendment No. 1 thereto filed with the Commission on May 16, 1994 and July 15,
1994, respectively, and are incorporated herein by reference.
-4-
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a 1994 Formula Stock Option Plan, as amended.
10b Agreement by and between BFR Industries Ltd. and the Elgin County Board of
Education.
</TABLE>
(9) The following exhibits were filed as part of the Company's Annual
Report on Form 10-KSB filed with the Commission on April 18, 1994 and are
incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a Amended and Restated Key Employee Agreement between the Company and Robin
E. Read.
10b 1992 Stock Option Plan, as amended.
10d Asset Purchase Agreement by and among the Company, K&S Energy Products, Inc.
and the Shareholders of K&S Energy Products, Inc.
10m Asset Purchase Agreement by and among the Company, Delavan Energy Services,
Inc. and Dunvegan Corporation.
10n Amendment, dated March 7, 1994, to Stock Purchase and Sale Agreement by and
among the Company, Elray Services, Inc. ("Elray") and the Stockholders of Elray.
10o Consulting Agreement by and between the Company and J.W. Barclay and Co., Inc.
</TABLE>
(10) The following exhibits were filed as part of the Company's Form
SB-2 Registration Statement (No. 33-57556) declared effective by the Commission
on December 3, 1993 and are incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
3a Certificate of Incorporation, as amended.
10d 1992 Stock Option Plan.
10e Leases for premises at 555 Wentworth Street E, Units 1 and 2, Oshawa, Ontario.
</TABLE>
-5-
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10f Lease for premises at 71 Marycroft Avenue, Unit 16, Woodbridge, Ontario, dated
April 30, 1992.
10g Lease for premises at 86 South Street, Hopkinton, Massachusetts, dated June 4, 1993.
10h Lease for premises at One Bridge Plaza, Marginal and North Central Road, Fort Lee,
New Jersey, dated September 2, 1993.
10i Lease for premises located at 1490 Broadway, Hewlett, New York, dated February
1, 1993.
10p Small Commercial and Industrial Lighting Construction Agreement between the
Company and Public Service Conservation Resources Corporation, dated August 26,
1993.
10q Leases for premises at 4801 Keele Street, Units 28, 29 and 30, Downsview, Ontario,
dated November 15, 1993.
</TABLE>
(11) The following exhibits were filed as part of the Company's Current
Report on Form 8-K filed with the Commission on November 12, 1993 and are
incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a Share Purchase Agreement by and among 1050822 Ontario Inc., ENCON Systems,
Inc., Christopher Gerard Morneau, and G. Morneau Investments Limited.
10b Share Purchase Agreement by and among 1050822 Ontario Inc., ENCON Systems,
Inc., and Patricia A. Morneau.
10c Memorandum of Agreement by and among ENCON Systems, Inc., 1050822 Ontario
Inc., G. Morneau Investments Limited and C. Gerard Morneau.
10d Memorandum of Agreement by and among ENCON Systems, Inc., 1050822 Ontario
Inc. and Patricia Morneau.
10e Promissory Note from 1050822 Ontario Inc. to G. Morneau Investments Limited for
$591,000 (Cdn.).
</TABLE>
-6-
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10f Promissory Note from 1050822 Ontario Inc. to C. Gerard Morneau for $196,016
(Cdn.).
10g Promissory Note from 1050822 Ontario Inc. to Patricia A. Morneau for $509,000
(Cdn.).
10h Promissory Note from 1050822 Ontario Inc. to Patricia Morneau for $15,000 (Cdn.).
10i Guarantee by and between ENCON Systems, Inc. and G. Morneau Investments
Limited.
10j Guarantee by and between ENCON Systems, Inc. and C. Gerard Morneau.
10k Guarantee by and between ENCON Systems, Inc. and Patricia Morneau.
10l General Security Agreement by and between Leader Lighting and Energy Services
Inc. and G. Morneau Investments Limited.
10m General Security Agreement by and between Leader Lighting and Energy Services
Inc. and Christopher Gerard Morneau.
10n General Security Agreement by and between Leader Lighting and Energy Services
Inc. and Patricia Morneau.
10o Share Exchange Agreement by and between ENCON Systems, Inc. and G. Morneau
Investments Limited.
10p Key Employment Agreement by and between Leader Lighting and Energy Services
Inc. and C. Gerard Morneau.
</TABLE>
(12) The following exhibits were filed as part of the Company's Annual
Report on Form 10-KSB filed with the Commission on April 15, 1993 and are
incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a Lease for premises at 10 Queens Quay West, Suite 311, Toronto, Ontario, dated
January 15, 1993.
10b Employment Agreement between the Company and Alan L. Freidman.
</TABLE>
-7-
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10c Employment Agreement between the Company and Arnold Freidman.
10d Employment Agreement between the Company and Adrien W. Hebert, Jr.
10h Informal Agreement between the Company and its Executive Officers relating to
Automobiles.
10i Agreement between BFR Industries Ltd. and Belle-Bridge Development Limited,
dated January 10, 1992.
10j Agreement between the Company and National Trust Company
("National") relating to the Lease and Assignment Agreements
between the Company and National, dated August 24, 1992.
</TABLE>
(13) The following exhibits were filed as part of the Company's Form
S-18 Registration Statement (No. 33-45982-B) declared effective by the
Commission on April 14, 1992 and are incorporated herein by reference:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
3a Certificate of Incorporation.
3b Bylaws.
4b Specimen Common Stock Certificate.
10f 1991 Stock Option Plan.
</TABLE>
Executive Compensation Plans and Arrangements.
a. The following exhibits relating to executive compensation plans and
arrangements were filed as part of the Company's Annual Report on Form 10-KSB
with the Commission on April 18, 1994:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10a Amended and Restated Key Employee Agreement between the Company and Robin
E. Read.
</TABLE>
-8-
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10b 1992 Stock Option Plan, as amended.
</TABLE>
b. The following exhibits relating to executive compensation plans and
arrangements were filed with the Commission as exhibit number 10d to the
Company's Form SB-2 Registration Statement (33-57556) declared effective on
December 3, 1993:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10d 1992 Stock Option Plan.
</TABLE>
c. The following exhibits relating to executive compensation plans and
arrangements were filed with the Commission as part of the Company's Annual
Report on Form 10-KSB filed with the Commission on April 15, 1993 as follows:
<TABLE>
<CAPTION>
Exhibit
No. Title
--- -----
<S> <C>
10b Employment Agreement between the Company and Alan L. Freidman.
10c Employment Agreement between the Company and Arnold Freidman.
10d Employment Agreement between the Company and Adrien W. Hebert, Jr.
10h Informal Agreement between the Company and its Executive Officers relating to
Automobiles.
</TABLE>
d. The following exhibit relating to executive compensation plans and
arrangements was filed with the Commission as exhibit number 10g to the
Company's Form S-18 Registration Statement (33-45982-B) declared effective by
the Commission on April 14, 1992:
(i) 1991 Stock Option Plan.
-9-
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K, dated November 7, 1995,
reporting that on November 2, 1995, it entered into an Agreement and Plan of
Merger with Kemper (the "Merger Agreement"), which the Company expected to close
on or before November 30, 1995.
The Company filed an amendment on Form 8-K/A, dated November 9, 1995,
to its Current Report on Form 8-K, dated November 7, 1995, to provide additional
information regarding the consideration to be exchanged in connection with the
Merger Agreement.
The Company filed a Current Report on Form 8-K, dated November 20,
1995, reporting that on November 20, 1995, it acquired all of the outstanding
stock of Kemper in exchange for (i) 675,000 shares of the Company's Common
Stock, (ii) promissory notes in the aggregate amount of approximately $534,000,
and (iii) cash of approximately $842,000. Kemper is a leading provider of energy
resource management services, primarily to the residential market.
The Company filed an amendment on Form 8-K/A, dated January 24, 1996,
to its Current Report on Form 8-K, dated November 20, 1995, to provide the
audited financial statements and pro forma financial information for the
acquisition of Kemper.
-10-
INDEX TO FINANCIAL STATEMENTS
Page
Independent Auditors' Reports ........................................... F-2-4
Consolidated Balance Sheets as of December 31, 1995 and 1994 ............ F-6
Consolidated Statements of Operations for the years ended
December 31, 1995 and 1994 .............................................. F-8
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1995 and 1994............................................... F-9
Consolidated Statements of Cash Flows for the years ended December
31, 1995 and 1994........................................................ F-10
Notes to Consolidated Financial Statements .............................. F-11
F-1
CRAIG J. DELFINO
- --------------------------------------------------------------------------------
-------------------------------
Certified Public Accountant
7630 Post Road
North Kingstown, RI 02852
(401)294-1210
(401)884-6694
Fax(401)294-2090
Report of Independent Accountant
--------------------------------
The Stockholders and Board of Directors
Enera Inc.
1105929 Ontario Limited and Subsidiaries
I have audited the accompanying balance sheet of 1105929 Ontario Limited
and Subsidiaries as of December 31, 1994, and the related statements of
operations, retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 1105929 Ontario Limited and
Subsidiaries as of December 31, 1994, and the resukts of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
Craig J. Delfino CPA
/s/ Craig J. Delfino
--------------------
February 17, 1995
F-2
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1995 and 1994
(With Independent Auditors' Report Thereon)
Independent Auditors' Report
----------------------------
The Stockholders and Board of Directors
Encon Systems, Inc. and subsidiaries:
We have audited the accompanying consolidated balance sheets of Encon Systems,
Inc. and subsidiaries as of December 31, 1995 and 1994, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. For the
year ended December 31, 1994, we did not audit the financial statements of
Enera, Inc., a wholly owned subsidiary, which statements reflect total assets of
12% and total revenues constituting 16% of the related 1994 consolidated totals.
These statements before restatement for the change in accounting were audited by
other auditors whose report has been furnished to us, and our opinion insofar as
it relates to the amounts included for Enera, Inc., is based solely on the
report of other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Encon Systems, Inc.
and subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The Company's financial statements for 1994 were previously prepared on the
basis of completed contract method for long term contracts. As more fully
described in note 2b to the consolidated financial statements, the Company
changed its method of accounting for long term contracts from completed contract
to percentage of completion in the current year. Consequently, the Company's
consolidated financial statement for 1994 referred to above have been restated
to conform with current year presentation. We also audited the adjustments
described in note 2 that were applied to restate the 1994 financial statements.
In our opinion, such adjustments are appropriate and have been properly applied.
F-3
The Stockholders and Board of Directors
Encon Systems, Inc. and subsidiaries
Page Two
The accompanying financial statements for 1995 have been prepared assuming that
the Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company's loss from operations and limited capital
resources raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
KPMG Peat Marwick LLP
Boston, Massachusetts
April 3, 1996
F-4
INTENTIONALLY LEFT BLANK
F-5
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
<TABLE>
<CAPTION>
Assets 1995 1994
------ ---- ----
<S> <C> <C>
Current assets:
Cash $ - 253,050
Accounts receivable, trade, net (notes 4 and 5) 7,460,777 5,797,280
Finished goods inventories 1,228,389 851,096
Costs in excess of billings 44,883 35,128
Prepaid expenses and other current assets 240,262 196,103
Notes receivable from officers (note 6) 100,967 134,196
Refundable income tax credits 263,383 251,121
------------- -------------
Total current assets 9,338,661 7,517,974
------------- -------------
Property and equipment, net (note 7) 614,027 374,961
------------- -------------
Long-term accounts receivable, net (note 5) 1,550,189 2,509,975
Long-term lease receivables 84,682 105,670
Organizational costs, net of accumulated amortization of
$44,957 in 1995 and $32,067 in 1994 39,481 61,513
Other assets, net 449,048 256,084
Cost in excess of net assets of businesses acquired, net
(note 3) 4,784,645 2,424,793
------------- -------------
Total assets $ 16,860,733 13,250,970
============= =============
</TABLE>
F-6
<TABLE>
<CAPTION>
Liabilities, Minority Interest and Stockholders' Equity 1995 1994
------------------------------------------------------- ---- ----
<S> <C> <C>
Current liabilities:
Cash overdraft $ 754,680 -
Notes payable to bank (note 8) 3,621,647 1,660,764
Note payable to utility 626,788 -
Current portion of notes payable to stockholders (note 9) 346,785 201,724
Current portion of long-term debt (note 10) 262,394 288,717
Current portion of GEPP financing (note 5) 372,694 337,004
Accounts payable 3,281,276 2,208,498
Accrued expenses 1,119,124 579,851
Billings in excess of costs 424,968 103,935
------------- -------------
Total current liabilities 10,810,356 5,380,493
------------- -------------
Long-term GEPP financing (note 5) 625,983 969,134
Notes payable to stockholders, net of current portion (note 9) 321,323 21,701
Long-term debt, net of current portion (note 10) 1,353,854 651,913
Other long-term debt 32,872 -
------------- -------------
Total liabilities 13,144,388 7,023,241
------------- -------------
Minority interest (note 13) 896,980 896,980
Stockholders' equity (notes 9 and 12):
Preferred stock, $.01 par value; 1,000,000 shares authorized,
none issued - -
Common stock, $.01 par value; 8,000,000 shares authorized,
4,258,634 shares issued and outstanding (2,340,078 in 1994) 42,587 23,401
Additional paid-in capital 7,452,863 5,433,971
Accumulated deficit (4,693,224) (117,682)
Cumulative translation adjustment 17,139 (8,941)
------------- -------------
Total stockholders' equity 2,819,365 5,330,749
------------- -------------
Total liabilities, minority interest and stockholders' equity $ 16,860,733 13,250,970
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net sales and revenues (notes 3, 16 and 17) $ 16,696,899 17,238,275
Cost of sales (note 16) 13,339,904 11,441,084
-------------- --------------
Gross profit 3,356,995 5,797,191
Selling, general and administrative expenses 7,501,452 5,276,111
-------------- --------------
Income (loss) from operations (4,144,457) 521,080
-------------- --------------
Other income (expense):
Interest expense (net) (453,486) (88,492)
Foreign currency exchange gain (loss) 83,433 (124,505)
Other (3,247) 9,468
-------------- --------------
(373,300) (203,529)
-------------- --------------
Income (loss) before income taxes (4,517,757) 317,551
Income tax (expense) benefit (note 14) (57,785) 178,197
-------------- --------------
Net income (loss) $ (4,575,542) 495,748
============== ==============
Net income (loss) per share $ (1.63) .19
============== =============
Pro forma data (unaudited):
Historical net earnings (loss) (4,575,542) 495,748
Salaries and benefits - 91,133
-------------- --------------
Proforma net income (loss) $ (4,575,542) 586,881
============== ==============
Pro forma net income (loss) per share $ (1.63) .23
============== =============
Weighted average number of common shares outstanding (note 2k) 2,814,330 2,580,694
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
Common stock Additional Cumulative Total
------------------------- paid-in Accumulated translation stockholders'
Shares Amount capital deficit adjustment equity
------ ------ ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993, as previously
reported 1,980,075 $ 19,801 $ 3,603,113 $ (1,046,665) $ 12,591 $ 2,588,840
Adjustment for the cumulative effect
on prior years of applying retro-
actively percentage of completion
(note 2b) - - - 433,235 - 433,235
----------- ------- ------------- ------------- ---------- --------------
Balance, December 31, 1993, as adjusted 1,980,075 19,801 3,603,113 (613,430) 12,591 3,022,075
Issuance of common stock in private
placement, net of expenses of
$422,426 375,000 3,750 1,452,574 - - 1,456,324
Issuance of common stock for Delavan 35,000 350 155,400 - - 155,750
Issuance of common stock for K&S 50,000 500 221,884 - - 222,384
Return of escrow shares (note 12) (99,997) (1,000) 1,000 - - -
Change in cumulative translation
adjustment - - - - (21,532) (21,532)
Net income - - - 495,748 - 495,748
----------- ------- ------------- ------------- ---------- --------------
Balance, December 31, 1994 2,340,078 23,401 5,433,971 (117,682) (8,941) 5,330,749
Issuance of common stock in private
placement, net of expenses of
$548,442 (note 12) 1,243,556 12,436 1,316,892 - - 1,329,328
Issuance of common stock for Kemper
Management Services (note 3) 675,000 6,750 702,000 - 708,750
Change in cumulative translation
adjustment - - - - 26,080 26,080
Net loss - - - (4,575,542) - (4,575,542)
----------- ------- ------------- ------------- ---------- --------------
Balance, December 31, 1995 4,258,634 $ 42,587 $ 7,452,863 $ (4,693,224) $ 17,139 $ 2,819,365
=========== ======= ============= ============= ========== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-9
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net income (loss) $ (4,575,542) 495,748
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization 275,756 286,833
Refundable income tax credits (12,262) (125,890)
Loss on disposal of assets - 4,765
Changes in assets and liabilities, net of effects of acquisition of
businesses:
Accounts receivable, net 1,013,499 (3,199,077)
Leases receivable 20,988 70,141
Inventories (217,796) 878,150
Costs in excess of billings (9,755) 208,094
Prepaid expenses and other current assets (30,377) (112,829)
Accounts payable 447,839 (460,670)
Billings in excess of costs 321,033 (16,850)
Accrued expenses (915,865) (55,388)
Other assets, net (144,915) 132,957
------------- --------------
Net cash used for operating activities (3,827,397) (1,894,016)
------------- --------------
Cash flows from investing activities:
Additions to property and equipment, net (49,245) (67,943)
Net cash used for acquisition of business net of cash acquired (827,726) -
------------- --------------
Net cash used for investing activities (876,971) (67,943)
------------- --------------
Cash flows from financing activities:
Increase in cash overdraft 754,680 -
Issuance (payments) of notes receivable from officers 33,229 (53,229)
Proceeds from note payable to bank 1,313,619 413,072
Proceeds from note payable to utility 626,788 -
Payments on loans from stockholders (24,068) (746,711)
Net proceeds from long-term debt 391,662 899,849
Issuance of common stock 1,329,328 1,456,324
------------- --------------
Net cash provided by financing activities 4,425,238 1,969,305
------------- --------------
Effect of exchange rate changes on cash 26,080 (21,532)
------------- --------------
Net decrease in cash (253,050) (14,186)
Cash at beginning of year 253,050 267,236
------------- --------------
Cash at end of year $ - 253,050
============= ==============
Supplemental disclosures of cash flow information:
Cash paid for:
Interest $ 1,151,871 546,511
============= ==============
Income taxes $ 22,267 6,233
============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-10
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995 and 1994
(1) NATURE OF BUSINESS AND LIQUIDITY
Encon Systems, Inc. and subsidiaries (the "Company") market and sell
lighting products to customers of electrical utility companies through
utility energy conservation programs sponsored by electric utility
companies. The Company also participates in energy management programs
in conjunction with customers and electric utility companies which
include contracts for installation of automated control systems and
heating, ventilation and air conditioning systems, and subsequent
monitoring of such systems.
The Company was incorporated on December 1, 1989, as a Rhode Island
corporation, and on January 21, 1992, merged into a newly formed
Delaware corporation with the same name (see note 12). In June 1993,
the Company changed its name from Mr. Bulb Co. to Encon Systems, Inc.
The Company's financial statements for the year ended December 1995 have
been prepared on a going concern basis which contemplates the
realization of assets and the settlement of liabilities and commitments
in the normal course of business. The Company incurred a net loss of
$4,575,542 for the year ended December 1995, and had a working capital
deficit of $1,471,695, an accumulated deficit of $4,693,224 and is in
default of its bank loans (note 8). The Company's working capital at
December 31, 1995 plus projected cash flows from ongoing operations
will not be sufficient to meet current obligations as presently
structured. Management recognizes that the Company must generate
additional financing and modify its operating costs to enable it to
continue to operate. Management's plans include consideration of the
sale of all or part of its Canadian subsidiary. Negotiations are
proceeding with a utility for a sale which has resulted in an agreement
in principal for a 51% sale of the Canada operations for $3.1 million.
Consideration of interim financing is also being negotiated with other
parties.
In that connection, the Company has retained investment banking counsel to
advise it on the possibility of interim financing as well as the
potential sale referenced above. The Company has also retained
independent consultants to assist it to identify other entities
interested in an alliance or partnership with the Company. Management
expects that these efforts will result in the introduction of other
parties with interest and resources which may be compatible with that
of the Company. However, no assurances can be given that the Company
will be successful in raising additional capital or entering into a
business alliance. Further, there can be no assurance, assuming the
Company successfully raises additional funds or enters into a business
alliance, that the Company will achieve profitability or positive cash
flow. Accordingly, there is substanital doubt about the Company's
ability to continue as a going concern.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The consolidated financial statements of the Company include the accounts
of all subsidiaries.
The consolidated financial statements of the Company include subsidiary
operating results as of the respective acquisition dates, which were
accounted for under the purchase method of accounting (see note 3).
(Continued)
F-11
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The consolidated financial statements of the Company have been prepared to
give retroactive effect to subsidiaries that were accounted for using
the pooling of interests (see note 3) method of accounting.
Certain reclassifications were made to the 1994 consoldiated financial
statements to conform to the 1995 presentation.
(b)Change in Method of Accounting for Utility Company Conservation Program
The Company has accounted for revenue and costs for construction contracts
completed generally after thirty days by using the percentage of
completion method in 1995, whereas in prior year revenue and costs were
determined by the completed contract method. With the acquisition of
Enera on December 31, 1994, which is principally engaged in long-term
contracts, the Company believes it is preferable to change to the
percentage of completion method. Accounting Research Bulletin #45
addresses preferability of method for accounting for income from long
term construction-type contracts. Financial statements of the prior
year have been restated to apply the new method retroactively. The
effect of the accounting change on income and the related per share
amounts of 1995 and 1994 is a decrease to net income of $(14,216), or,
less than .01 per share; and a decrease in net income of $(521,305),
or, $(.20) per share, respectively. The balances of retained earnings
for 1995 and 1994 have been adjusted for the effect of applying
retroactively the new method of accounting.
(c) Sales and Revenue Recognition
Product Sales
-------------
Revenue is recognized at the time of shipment for sales of lighting
products.
Utility Company Conservation Programs
-------------------------------------
For financial statement purposes, revenues and profit are recorded
using the percentage-of-completion method for certain contracts
based on the duration of time to completion. The percentage of
completion is determined by relating the actual cost of work
performed to date to the current estimated total cost of the
respective contracts. If estimated total costs on any of these
contracts indicate a loss, the loss is recognized immediately.
Revenues and profits on all contracts completed within thirty days
are recorded under the completed contract method.
Costs and estimated earnings in excess of billings on uncompleted
contracts, as reflected on the accompanying consolidated balance
sheet, comprise amounts of revenue recognized on contracts for which
billings have not been rendered. Billings in excess of costs and
estimated earnings on uncompleted contracts comprise amounts of
billings recognized on contracts for which costs have not been
incurred.
(Continued)
F-12
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Guaranteed Energy-savings Contracts
-----------------------------------
The Company enters into guaranteed energy-savings contracts ( a DSM
program sponsored by Ontario Hydro) whereby in exchange for the
Company installing energy-efficient equipment, the customer agrees
to pay the Company a minimum level of utility payments over the life
of the contract, and the Company agrees to receive the utility bills
on behalf of the customer and pay the utility bills out of the
minimum payments received. These contracts include Guaranteed Energy
Performance Program contracts ("GEPP contracts"). At the time the
equipment is installed if risk of ownership has passed to the
customer and if the customer's energy savings, and therefore utility
bills, are reliably determined based on the results of an
independent engineering study, then the Company recognizes revenue,
on a discounted basis, for the difference between the minimum
payments to be received from the customer and the estimated amounts
due to the utility. The Company also accrues on a discounted basis
the estimated costs to monitor the energy equipment. In addition,
the Company recognizes incentive rebates due from the utility for
the installation of the equipment at the time of installation based
on the results of an independent engineering study. The rebate is
generally paid by the utility over a three-year period plus interest
at a predetermined rate.
The Company monitors the actual energy consumption results with
estimated results and adjusts the accounts receivable and accounts
payable balances. Any increase in estimated net revenues would
result in a credit to income in the period in which the Company
receives the increase in cash. Any decrease in projected revenue
would be charged to income in the earliest period that such decrease
is known. If the risk of ownership has not passed to the customer or
if the customer's energy savings cannot be reliably determined, then
the income on the contract would be recognized on a month-to-month
basis.
(d) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts and revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
(e) Concentrations of Credit Risk
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts
receivable and long-term accounts receivable. Accounts receivable from
utilities related to rebate programs and incentives are due primarily
from three electric utility companies in 1995 and 1994. These rebates
and incentives represent 25% of the combined trade and long term
receivables in both 1995 and 1994, respectively.
(f) Inventories
Inventories consist of lighting fixtures, fixture components, light bulbs
(finished goods), and sensors used in control systems and are stated at
the lower of cost or market. Cost is determined by the specific
identification method.
(Continued)
F-13
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(g) Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization
is provided for by the straight-line method for financial reporting
purposes and by accelerated methods for income tax purposes over the
estimated useful lives of the related assets as follows:
Furniture and fixtures 7 years
Equipment 5 - 7 years
Delivery vehicles 5 years
Leasehold improvements 5 years
(h) Deferred Financing and Organizational Costs
Deferred financing costs are amortized over the terms of the related
financing agreements. Organizational costs are amortized over five
years using the straight-line method.
(i) Intangible Assets
The excess of cost over net assets of businesses acquired is amortized on
a straight-line basis over a range of seven to twenty years for the
Kemper Management Services Acquisition, Leader Lighting, K&S, Delavan
and the Marathon acquisitions (note 3(b)). A covenant not to compete,
included in other assets, is amortized on a straight line basis over
six years.
The Company evaluates the recoverability of the intangible by assessing
whether the amortization of the asset balance can be recovered through
expected future results. Expected future results are based on
historical trends, sales forecasts and market trends projected over the
remaining lives of the excess of cost over net assets acquired.
(j) Income Taxes
Effective January 1, 1992, Encon Systems, Inc. terminated its S
corporation election and the S corporation retained earnings were
contributed to the capital of the Company by the stockholders.
Beginning January 1, 1992, the Company is liable for federal and state
taxes and accounts for income taxes according to the liability method
whereby deferred tax assets and liabilities are recorded based on the
difference between the tax basis of assets and liabilities and their
carrying amounts for financing statement reporting purposes.
(k) Earnings Per Share
Earnings per share of common stock are based on the weighted average
number of shares of common stock and common stock equivalents (note 12)
outstanding, adjusted, when dilutive, for the number of shares issuable
upon assumed exercise of stock options and warrants after the assumed
repurchase of shares with the related proceeds.
(l) Foreign Currency Translation
The Company's Canadian subsidiaries maintain their books and records in
Canadian dollars. Assets and liabilities of these operations are
translated into U.S. dollars at the prevailing exchange rate at the
balance sheet date. Revenues and expenses are translated at exchange
rates prevailing during the period. The resulting gain or loss is
recorded in the cumulative translation adjustment account in the
stockholders' equity section of the consolidated balance sheet.
Transaction gains or losses are reflected in other expense in the
consolidated statement of operations.
(Continued)
F-14
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(m) Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107 requires that
reporting entities provide, to the extent practicable, the fair value
of financial instruments, both assets and liabilities. The carrying
amounts for the Company's financial instruments approximate fair value.
(3) ACQUISITIONS
(a) Pooling-of-Interests Transactions
In December 1994, the Company acquired all of the outstanding common stock
of Enera in a transaction accounted for as a pooling-of-interests in
exchange for 72,000 shares of the Company's common stock, 110,000
shares of the Company's Series B common stock and 110,000 special
shares of 1111576 Ontario, Inc., a Canadian subsidiary of the Company.
Additionally, the Company entered into a share exchange agreement
whereby one share of the Company's Series B common stock and one
special share of the Company's Canadian subsidiary, may be exchanged
for one share of common stock of the Company. Due to the exchange
provision, the outstanding Series B and special shares have been
reflected for financial reporting purposes in the accompanying
financial statements as outstanding common stock of the Company, since
the shares have the same benefits and risks of common stock.
Accordingly, the consolidated financial statements for periods prior to
the combination have been restated to include the accounts and results
of operations of Enera. Enera markets and sells energy efficient
automation systems principally in the province of Ontario, Canada.
In connection with the acquisition, the Company entered into employment
agreements with the previous owners' of Enera whose duties and
responsibilities will remain unchanged from prior to the merger. As
senior members of management of Encon, the previous owners could
receive stock option awards priced at the fair market value at the date
of award, if certain performance targets are achieved. As reflected in
the consolidated statements of operations, the pro forma net income for
the year ended December 31, 1994 reflects an adjustment for a
contractual reduction made to the former owners' salaries. The proforma
presentation is necessary for investors to realistically assess the
impact of the transaction.
The combined amounts presented in the accompanying consolidated financial
statements are summarized as follows:
<TABLE>
<CAPTION>
Net sales Net
1994 and revenues income
---- ------------ ------
<S> <C> <C>
Encon Systems, Inc. $ 14,451,295 399,463
Enera 2,786,980 96,285
--------------- -----------
Combined $ 17,238,275 495,748
=============== ===========
</TABLE>
(b) Purchase Transactions
In October 1995, the Company acquired all of the outstanding common stock
of Kemper Management Systems, Inc. ("KMS") in exchange for 675,000
shares of the Company's common stock valued at $708,750, promissory
notes in the aggregate amount of approximately $534,000 and the payment
of $842,000. The acquisition was accounted for by the purchase method
of accounting, accordingly the purchased assets and liabilities have
been recorded at their estimated fair values at the acquisition. The
excess of the purchase price over the estimated fair value of the net
tangible assets has been recorded as goodwill $2,264,114 which will be
amortized over twenty years. KMS sells, installs and administers
conservation management programs for utilities in Connecticut,
Massachusetts, Maryland, Iowa, and Colorado.
(Continued)
F-15
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The results of operations for the acquired business have been included in
the consolidated financial statements since the date of acquisition.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and KMS as if the
acquisition had occurred at the beginning of 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Net sales and revenues $ 22,496,837 34,165,854
Net income (loss) (4,706,733) 868,618
Net income (loss) per share (1.67) .34
</TABLE>
In March 1994, the Company acquired the operating assets of K&S Energy
Products, Inc. ("K&S") in exchange for 50,000 shares of the Company's
common stock valued at $222,384 and the payment of certain liabilities
including a note to the stockholders for a non-competition agreement.
The acquisition was accounted for by the purchase method of accounting,
accordingly the purchased assets and liabilities have been recorded at
their estimated fair values at the date of acquisition. The excess of
the purchase price over the estimated fair value of the net tangible
assets acquired has been recorded as a non-competition agreement
($120,000) and goodwill ($410,075), which will be amortized over 6
years and 20 years, respectively. K&S installs and sells energy
efficient products principally to customers in the hospitality industry
in the same service areas as the Company with the exception of Canada.
In March 1994, the Company acquired the assets of Delavan Energy Services,
Inc. ("Delavan"), in exchange for 35,000 shares of common stock valued
at $155,750. This amount represents the goodwill recorded which will be
amortized over a 20 year period. The acquisition was accounted for by
the purchase method of accounting, accordingly the purchased assets and
liabilities have been recorded at their estimated fair values at the
date of acquisition. Delavan participates in DSM programs sponsored by
Florida Power in Florida.
The results of operations for the acquired businesses have been included
in the consolidated financial statements since the date of acquisition.
The operating results of K&S and Delavan on a pro forma basis for the
years ended December 31, 1994 would have been immaterial.
Based on future forecasted results, including the pending partial sale of
the Canadian operation, management does not believe that an impairment
of its goodwill has occurred.
(Continued)
F-16
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(4) ACCOUNTS RECEIVABLE, TRADE
Accounts receivable, trade, consisted of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Accounts receivable - utility company conservation programs $ 6,771,148 5,053,127
Accounts receivable - current portion of GEPP contracts 983,357 729,264
Accounts receivable - product sales 36,481 86,133
Accounts receivable - other 117,434 137,265
------------- ------------
7,908,420 6,005,789
Less allowance for doubtful accounts (447,643) (208,509)
------------- ------------
$ 7,460,777 5,797,280
============= ============
</TABLE>
(5) GEPP CONTRACT
Under a GEPP contract entered into during 1992, the Company recognized
gross profit of $226,672 for the year ended December 31, 1992, based on
discounted cash flows to be received and paid under the terms of the
contract. During 1993, the Company determined that the original
projections of revenues and costs for the contract entered into during
1992 were incorrect due to circumstances that were unknown at the time
the contract was signed. As a result, the Company installed additional
energy-efficient equipment during 1993 and 1994. The customer agreed to
pay higher monthly amounts to the Company and shared in the cost of
this additional equipment. At December 1993, the Company revised its
projections of revenues and costs of this GEPP contract.
During 1994, the Company entered into two GEPP contracts. The Company
recognized gross profit of $1,012,849 during 1994 based on discounted
cash flows to be received and paid under the terms of the contracts.
At December 31, 1995, the Company has provided approximately $474,000 for
all future losses on these contracts that can be reasonably estimated.
(Continued)
F-17
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The components of the GEPP contracts at December 31 are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
Assets
------
<S> <C> <C>
Receivable due from customers in estimated monthly installments ranging
from $17,000 to $89,000 through January 2002;
discounted at rates ranging from 9% through 14.75% per annum $ 6,190,790 7,304,158
Receivables due from electric utility for energy
reduction rebates in installments through 1998 803,706 973,138
------------ ------------
6,994,496 8,277,296
Less current portion 2,072,614 1,686,635
------------ ------------
Long-term accounts receivable 4,921,882 6,590,661
Deferred equipment costs 125,058 149,038
------------ ------------
Total assets $ 7,119,554 8,426,334
============ ============
Liabilities
-----------
Payable due utility in estimated monthly installments ranging from
approximately $10,000 to $60,000 through January 2002; discounted at
rates ranging from 9% through 14.75%
per annum 3,987,190 4,886,408
------------ ------------
Financing arrangements
----------------------
Payable to leasing company in 11 monthly installments of $26,291 and 1
installment of $66,457 per annum through March 1998,
including interest at 9% per annum 715,657 971,132
Payable to leasing company in monthly installments of $5,802
through January 1998, with final payment of $99,356
in February 1998; including interest at 12.75% per annum 203,082 237,991
Payable to leasing company in monthly installments of $2,229
through January 1998, with final payment of $34,178 in
February 1998; including interest at 12.94% per annum 79,938 97,015
------------ ------------
4,985,867 6,192,546
Less current portion 1,461,951 1,294,375
------------ ------------
Long-term accounts payable 3,523,916 4,898,171
Provision for losses 473,760 151,649
------------ ------------
Total liabilities $ 5,459,627 6,344,195
============ ============
Total receivable current portion $ 2,072,614 1,686,635
Total payable current portion 1,461,951 1,294,375
Less financing current portion shown separately 372,694 337,004
------------ ------------
Payable current portion 1,089,257 957,371
------------ ------------
Net receivable current portion $ 983,357 729,264
============ ============
Long term accounts receivable 4,921,882 6,590,661
Total long term payables 3,997,676 5,049,820
Less financing long term shown separately 625,983 969,134
------------ ------------
Total long term payables 3,371,693 4,080,686
------------ ------------
Net long term receivable $ 1,550,189 2,509,975
============ ============
</TABLE>
(Continued)
F-18
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The receivable balances are estimated to be collected as follows:
<TABLE>
<CAPTION>
Customer Utility Total
-------- ------- -----
<S> <C> <C> <C>
Year ending December 31:
1996 $ 1,679,114 393,500 2,072,614
1997 1,851,775 278,184 2,129,959
1998 1,890,704 132,022 2,022,726
1999 410,044 - 410,044
2000 158,758 - 158,758
Thereafter 200,395 - 200,395
------------ --------- ------------
$ 6,190,790 803,706 6,994,496
============ ========= ============
The payable balances are estimated to be paid as follows:
Leasing
Utility Company Total
------- ------- -----
Year ending December 31:
1996 $ 1,089,257 372,694 1,461,951
1997 1,204,364 408,362 1,612,726
1998 1,222,905 217,621 1,440,526
1999 251,747 - 251,747
2000 96,770 - 96,770
Thereafter 122,147 - 122,147
------------ --------- ------------
$ 3,987,190 998,677 4,985,867
============ ========= ============
</TABLE>
The payable to leasing company is pursuant to a lease agreement whereby
the lessor has a security interest in the receivables due under the
GEPP contract.
(6) NOTES RECEIVABLE FROM OFFICERS
Notes receivable from officers of the company, who are also stockholders,
totaled $100,967 at December 31, 1995 and $134,196 at December 31,
1994. The notes are payable in 1996 with interest at 6% per annum.
(7) PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Furniture and fixtures $ 166,362 136,989
Equipment 686,860 362,815
Vehicles 103,775 95,860
Leasehold improvements 111,341 101,407
------------- -----------
1,068,338 697,071
Less accumulated depreciation and amortization (454,311) (322,110)
------------- -----------
$ 614,027 374,961
============= ===========
</TABLE>
(Continued)
F-19
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(8) FINANCING AGREEMENTS
In July 1995, the Company entered into a bank line of credit agreement
whereby Enera and Encon Systems Canada, Inc. may borrow up to
$1,460,000 with interest at the prime rate plus 1% (9.5% at December
31, 1995). The line of credit is a bank overdraft secured by accounts
receivable. Outstanding borrowings under this line of credit at
December 31, 1995, were $1,520,632. At December 31, 1995, the Company
was not in compliance with certain restrictive covenants of this
agreement but has been granted a waiver from the bank to regularize
the covenant defaults by March 31, 1996. On March 28, 1996, the Bank
allowed the forbearance/expiration date to remain at July 15, 1996,
in exchange for certain fees and an increased interest rate of prime
rate plus 2%.
In July 1995, the Company entered into a bank line of credit agreement
whereby the Company may borrow up to $1,700,000 with interest at the
prime rate plus .5% (9% at December 31, 1995). Outstanding borrowings
under this line of credit at December 31, 1995 were $1,700,000. The
Company was in default of its bank agreement which the bank has
waived.
In July 1995, the Company entered into a revolving note agreement with a
utility company whereby the Company may borrow up to $750,000 with
interest at 12%. Outstanding borrowings under this revolving note at
December 31, 1995 were $53,185. The revolving note is due June 1996.
In addition, in November 1995, the Company entered into two short
term loans for $125,000 and $350,000 with interest at 13%. Encon
Canada also had short-term borrowings of $98,603.
The Company's subsidiary, KMS, has entered into a line of credit
agreement with a bank whereby the Company may borrow up to $1,000,000
with interest at prime rate plus 1% (9.5% at December 31, 1995). The
line of credit is guaranteed by the Company and former principals of
KMS. Outstanding borrowings at December 31, 1995 were $401,015.
In January 1996, the Company entered into a $2,000,000 working capital
line of credit to refinance its $1,000,000 line which terminates on
January 30, 1997 with interest at the bank's prime rate (7.5% at
December 31, 1995) plus .75% per annum.
(9) NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Promissory note to stockholder, interest at 9% per annum (a) $ - 23,584
Promissory note to stockholder, payable through October 1997,
with interest at 9% per annum (a) 32,367 30,180
Promissory note to stockholder, payable in equal quarterly
installments of $34,915, payable on first day of February,
May, August and November 1996 at the prime rate of
interest plus 2% (10.5% at December 31, 1995) (b) 171,466 139,661
Promissory note to stockholders, interest rate of 7.5% per annum (c) - 30,000
Promissory notes to stockholders, payable June 1, 1996, with
interest at 10.75% per annum (d) 52,667 -
Promissory notes to stockholders, payable through November
1999, with interest at 10.75% (d) 411,608 -
----------- ------------
668,108 223,425
Less current portion (346,785) (201,724)
----------- ------------
Notes payable to stockholders, less current portion $ 321,323 21,701
=========== ============
</TABLE>
(Continued)
F-20
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(a)These promissory notes were issued in connection with the redemption
of preferred stock of BFR in October 1992. The notes are secured by
receivables due under a GEPP contract entered into by BFR (see note 5).
This security is subordinated to the lessor of an equipment lease
entered into by BFR under the same contract.
(b)These promissory notes were issued in connection with the Encon
Systems, Canada, Inc. acquisition. The notes are secured by the assets
of Encon Systems, Canada, Inc., and the Company has guaranteed payment.
(c)These promissory notes were issued in connection with the K&S
acquisition.
(d)These promissory notes were issued in connection with the KMS
acquisition.
Aggregate maturities due for years subsequent to December 31, 1996 are as
follows:
Year ending December 31:
1997 $ 128,687
1998 96,320
1999 96,316
----------
$ 321,323
==========
(10) LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Loan payable to bank in monthly installments of $4,215
through July 1999 with interest at 9.65% per annum,
secured by Encon Systems, Inc. assets $ 146,791 183,682
Loan payable to utility company in monthly installments
of $16,698 through December 1998 with interest at
15% per annum, secured by GEPP project assets 524,661 600,000
Loan payable to utility company with principal payment
of $900,000 due November 1999, bearing interest
of 13% per annum 900,000 105,000
Loan payable to bank in monthly installments of $1,244
through February 1997, with interest at 7% per annum;
secured by accounts receivable of BFR 23,643 37,636
Other 21,153 14,312
------------ ----------
1,616,248 940,630
Less current portion (262,394) (288,717)
------------ ----------
Long-term debt, less current portion $ 1,353,854 651,913
============ ==========
</TABLE>
(Continued)
F-21
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Aggregate maturities of long-term debt for years subsequent to December
31, 1996, are as follows:
Year ending December 31:
1997 $ 210,216
1998 220,895
1999 922,743
----------
$ 1,353,854
==========
(11) COMMITMENTS
(a) Leases
The Company has noncancelable operating leases for office and warehouse
space that expire through December 1999. Rental expense for office
and warehouse facilities totaled $189,768 and $158,179 for the years
ended December 31, 1995 and 1994, respectively.
Future minimum lease payments under noncancelable operating leases are
as follows:
1996 $ 241,439
1997 108,238
1998 59,529
1999 30,191
---------
Total minimum lease payments $ 439,397
==========
(b) Employment Agreements
During 1992 through 1995, the Company entered into employment agreements
with 12 officers of the Company. The agreements expire through
October 1998, with automatic extension for successive one-year
periods, unless terminated by either party. The Company is committed
to pay an aggregate of at least $1,950,950 under these employment
agreements over the next three years. The annual compensation of the
12 officers under these employment agreements is $951,700.
(c) Guarantees
During 1995, the Company entered into an energy performance contract
with a customer. The customer entered into a 65 month lease to
finance the contract. The Company guaranteed one half of the lease
payments. Monthly lease payments are $14,467. The customer is current
with the lease payments.
In November 1994, the Company entered into an energy performance
contract with a customer. The customer entered into a 60 month lease
to finance the contract. The Company along with the customer and its
shareholders have guaranteed 100% of the lease payments. Monthly
lease payments are $3,435. The customer is current with the lease
payments.
The Company does not expect to incur significant, if any, losses as a
result of these guarantees.
(Continued)
F-22
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(12) STOCKHOLDERS' EQUITY
(a) Common Stock and Warrants
In April 1992, the Company completed its initial public offering of
580,750 units. Each unit consisted of one share of common stock and
one redeemable common stock purchase warrant. The proceeds, net of
underwriting discounts and expenses amounted to $2,088,296. The
warrants allow the holder to purchase one share of common stock for
1.225 warrants. The exercise price is $4.76 per common share, and the
warrants are exercisable through April 15, 1996. The Company may
redeem the warrants at a price of $.05 per warrant if the average
market closing price of common stock equals or exceeds $8.50 per
share for 30 consecutive trading days. In connection with the initial
public offering in April 1992, the Company also issued warrants to
the underwriter of the public offering to purchase 25,200 shares of
common stock at $4.56 per share. The warrants became exercisable in
April 1993 and expire in April 1996.
In April 1994, the Company issued 375,000 shares of common stock in a
private placement. The net proceeds from this placement were
$1,456,324.
In May 1994, the Company increased the number of authorized shares of
common stock from 4,000,000 shares to 8,000,000 shares.
In December 1995, the Company issued 1,243,556 shares of common stock in
a private placement. The net proceeds from this placement were
$1,329,328.
(b) Preferred Stock
In January 1992, the Company authorized for issuance 1,000,000 shares of
preferred stock, $.01 par value. No shares of preferred stock have
been issued.
(c) Escrow Shares
In connection with the public offering of stock, the Company's
stockholders prior to the offering ("existing stockholders") placed
in escrow an aggregate of 200,000 of their shares of common stock.
During 1993, 50,000 shares were released to stockholders and 50,000
shares were returned to the Company and canceled based on actual
financial results for the year ended December 31, 1992. During 1994,
99,997 shares were returned to the Company and canceled based on
actual financial results for the year ended December 31, 1993.
(d) Stock Option Plan
In 1992, the Company established Stock Option Plans ("the Plans") which
provide for the granting of incentive stock options to employees of
the Company and nonqualified stock options to nonemployee directors,
employees and independent consultants of the Company. A total of
850,000 shares may be granted under the Plans. Incentive stock
options and nonqualified options cannot be granted at a price which
is less than the fair market value of the Company's common stock at
the grant date and expire no later than ten years after the date of
grant. At December 31, 1995, 746,154 options had been granted and
were outstanding under the Plans, with exercise prices of $3.88 per
share, and 721,379 options were exercisable at $3.88 per share.
(Continued)
F-23
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In 1995, the Company established the 1995 Stock Option Plan which
provides for the granting of incentive stock options to employees of
the Company and nonqualified stock options to nonemployee directors
and employees of the Company. A total of 500,000 shares may be
granted under the Plan. At December 31, 1995, 254,000 had been
granted and were outstanding under the Plan, with exercise prices of
$4.00 per share and 83,821 options were exercisable at $4.00 per
share.
In May 1994, the Company established a Formula Stock Option Plan which
provides for the granting of nonqualified stock options to
nonemployee directors of the Company. Under this plan, 75,000 shares
of common stock have been reserved for issuance. At December 31,
1995, 16,667 options had been granted and were outstanding under the
plan, with exercise prices at $5.25 per share. The exercise price of
the remaining options will be the fair market value of the shares of
stock on the date of grant. 5,002 options were exercisable at
December 31, 1995.
The Financial Accounting Standards Board recently issued Statement of
Financial Accounting Standards No. 123 (SFAS 123), Accounting for
Stock-Based Compensation. SFAS 123 permits either the recording of
the cost of stock-based compensation over the applicable vesting
period or disclosing the unrecorded cost and related effect on
earnings per share in the financial statement footnotes. The Company
continues to evaluate the provisions of this statement, which will be
effective for 1996, as it prepares for adoption.
(13) MINORITY INTEREST
In November 1993, a wholly owned Canadian subsidiary of the Company
acquired the outstanding stock of two companies in exchange for
197,000 special shares of Encon Systems Canada, Inc. and promissory
notes aggregating approximately $825,000. The special shares must be
exchanged for an equal amount of shares of common stock of Encon
subject to the terms of the Share Exchange Agreement between the
Company and G. Morneau Investments Limited (the "Share Exchange
Agreement"). These shares have been reflected for financial reporting
purposes in the accompanying financial statements as a minority
interest of the Company.
(14) INCOME TAXES
Income tax expense (benefit) consists of:
<TABLE>
<CAPTION>
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Year ended December 31, 1995:
U.S. federal $ (16,521) - (16,521)
State and local 72,797 - 72,797
Foreign 1,509 - 1,509
---------- --------- -----------
$ 57,785 - 57,785
========== ========= ===========
Year ended December 31, 1994:
U.S. federal $ 20,600 - 20,600
State and local 4,400 - 4,400
Foreign (203,197) - (203,197)
---------- --------- -----------
$ (178,197) - (178,197)
========== ========= ===========
</TABLE>
(Continued)
F-24
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Income tax expense (benefit) differed from the amounts computed by
applying the U.S. federal income tax rate of 34 percent to pretax
income (loss) as a result of the following for the years ended
December 31:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Computed "expected" tax expense (benefit) $ (1,536,037) 107,967
Increase (reduction) in income taxes resulting from:
State taxes 48,046 2,904
Foreign tax rate differential (499,454) 42,121
Net operating loss no longer available - 123,088
Change in federal valuation allowance 1,789,049 (283,788)
Prior year overaccrual (2,945) -
Amortization of goodwill 49,562 46,366
Refundable income tax credits - (203,197)
Other 209,564 (13,658)
-------------- -----------
$ 57,785 (178,197)
============== ===========
At December 31, 1995 and 1994, the tax effects of temporary differences
that give rise to significant portions of the deferred tax assets and
liabilities are presented below:
1995 1994
---- ----
Deferred tax assets:
Net operating losses $ 2,095,368 713,937
Allowance for doubtful accounts 182,180 89,574
Unrealized exchange loss - 49,802
Non-compete agreement 11,200 4,800
Professional fees 27,800 -
Accrued severance 88,054 -
Obsolescence reserve 15,213 -
GEPP reserve 209,782 -
Other 4,159 -
-------------- -----------
2,633,756 858,113
Less valuation allowance (2,158,738) (369,689)
-------------- -----------
475,018 488,424
Deferred tax liabilities:
Property and equipment $ 35,645 25,740
Deferred income for tax purposes 418,889 451,184
Goodwill 13,397 11,500
Unrealized exchange gain 1,764 -
Organizational cost 5,323 -
-------------- -----------
475,018 488,424
Net deferred tax asset $ - -
============== ===========
</TABLE>
(Continued)
F-25
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Due to the uncertainty of realizing the tax benefit of the temporary
differences and carryforwards, the Company has recorded a valuation
allowance against its deferred tax assets at December 31, 1995 and
1994.
At December 31, 1995, the Company had net operating loss carryforwards
for foreign tax purposes of $988,000, which are available to offset
future taxable income. If unused, these losses will begin to expire
in 2001.
(15) RETIREMENT PLAN
The company's defined contribution plan, which is available to
substantially all salaried and hourly employees, contains a matching
savings provision that permits both pretax and after-tax employee
contributions. Participants can contribute from 2% to 6% of their
annual compensation and receive a 35% matching employer contribution
up to 5% of their annual compensation. The Company's contribution to
this plan is discretionary. Total expense amounted to $5,702 and
$3,674 for 1995 and 1994, respectively.
(16) MAJOR CUSTOMERS, SUPPLIERS AND RELATED PARTIES
The Company participates in a demand side sales program sponsored by a
major utility. Sales under this program amounted to 15% of total net
revenues during 1995 and 9% of total net revenues during 1994.
Accounts receivable from this customer amounted to $1,505,286 and
$875,416 in 1995 and 1994, respectively. This utility also provided
short-term and long-term project financing to the Company during
1995. At December 31, 1995, there was net short-term financing
outstanding in the amount of $626,788 and net long-term financing
outstanding in the amount of $1,424,661. Interest expense paid and
secured to this utility during 1995 amounted to $124,752.
For the year ended December 31, 1994, two customers accounted for 12%
and 10% of total net revenues. Accounts receivables from these
customers amount to $676,000 as of December 31, 1994.
During 1995, total purchases did not exceed 10% with one vendor. During
1994, 12% of the Company's total purchases were made with one vendor.
A stockholder of the Company is an independent sales representative for
the Company. Sales made by this representative were less than 5% of
total net revenues and sales of the Company for the years ending
December 31, 1995 and 1994.
(17) GEOGRAPHICAL INFORMATION
TheCompany operates two subsidiaries in Ontario, Canada. The following
summarizes financial data by geographical area:
<TABLE>
<CAPTION>
United States Canada Total
------------- ------ -----
Year ended December 31, 1995
----------------------------
<S> <C> <C> <C>
Net sales and revenues $ 9,540,787 7,156,112 16,696,899
Loss from operations (2,474,073) (1,670,384) (4,144,457)
Identifiable assets $ 8,777,890 8,157,843 16,860,733
</TABLE>
(Continued)
F-26
ENCON SYSTEMS, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
<CAPTION>
United States Canada Total
------------- ------ -----
Year ended December 31, 1994
----------------------------
<S> <C> <C> <C>
Net sales and revenues $ 5,898,907 11,339,368 17,238,275
Income (loss) from operations 584,156 (63,076) 521,080
Identifiable assets $ 4,734,714 8,516,256 13,250,970
</TABLE>
(18) NONCASH FINANCING TRANSACTIONS
The following noncash transactions occurred during 1995 and 1994:
In 1995, the Company acquired KMS by issuing common stock valued at an
aggregate of $702,000 and promissory notes in the aggregate amount of
$534,000. (See note 3).
In 1994, the Company acquired the assets of K&S and Delavan by issuing
common stock valued at an aggregate of $378,134 and notes payable of
$120,000. (See note 3.)
(19) LITIGATION
BFR is presently involved as a defendant in an action by a
subcontractor, E.C.M. Systems, Incorporated ("ECM"), in a dispute
arising out of a contract for ECM to install certain customer orders
for BFR. Despite a settlement agreement entered into by BFR and ECM
related to the termination of this contract, on February 16, 1994,
ECM filed suit against BFR in the Ontario Court (General Division),
claiming damages of approximately $110,000 on the basis of losses due
to the terminated contract, $127,803 in general damages and $36,515
in punitive or exemplary damages. This action is currently completing
discovery stage and a trial date has been scheduled for November
1996. The Company intends to vigorously defend this suit, and
management does not believe that the outcome of this litigation will
have a material adverse effect on the Company's financial position or
results of operations.
In addition, the Company was also involved in various legal matters
which are being defended and handled in the ordinary course of
business. Management does not expect that they will have a material
adverse effect on the Company's results of operations or financial
position.
(20) FOURTH QUARTER ADJUSTMENTS
During the fourth quarter, the Company made several year-end adjustments
to the allowance for doubtful accounts, and increase to the
receivable provision for GEPP losses and a write-down of inventory
based on the year end physical inventory count. The total adjustment
to reduce income in the fourth quarter for these items was
approximately $1,260,000.
(21) SUBSEQUENT EVENT
On February 8 and 13, 1996, the Company issued 471,789 and 305,802
shares of common stock for $577,684 and $292,654. The proceeds will
be used for working capital and general corporate purposes.
F-27
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
No. Title Page Number
--- ----- -----------
<S> <C> <C>
23a Consent of KPMG Peat Marwick LLP.
23b Consent of Craig J. Delfino, CPA.
23c Consent of Coopers & Lybrand L.L.P.
</TABLE>
-11-
The Board of Directors
Encon Systems, Inc.:
We consent to incorporation by reference in the registration statements
(33-81756) and (33-88118) on Forms S-3 and (33-93262) on Form S-8 of Encon
Systems, Inc. of our report dated April 3, 1996, relating to the consolidated
balance sheets of Encon Systems, Inc. and subsidiaries as of December 31, 1995
and 1994, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the years in the two-year period ended
December 31, 1995, which report appears in the December 31, 1995 annual report
on Form 10-KSB of Encon Systems, Inc.
Our report refers to a change to the percentage of completion method of
accounting for long-term contracts.
Our report dated April 3, 1996 contains an explanatory paragraph that states
that the accompanying financial statements for 1995 have been prepared assuming
that the Company will continue as a going concern. As discussed in note 1 to the
financial statements, the Company's loss from operations and limited capital
resources raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
June 11, 1996
CRAIG J. DELFINO
- --------------------------------------------------------------------------------
Certified Public Accountant
7630 Post Road
North Kingstown, RI 02852
(401) 294-1210
(401) 884-6694
Fax (401) 294-2090
Consent of Certified Public Accountant
The Board of Directors
Encon Systems, Inc.
1105929 Ontario Limited and Subsidiaries:
We consent to incorporation by reference in the registration statements
(33-81756) and (33-88118) on Forms S-3 and (33-93262) on Form S-8 of Encon
Systems, Inc. of our report dated February 17, 1995, relating to the financial
statements of 1105929 Ontario Limited and Subsidiaries for the year ended
December 31, 1994, which report appears in the December 31, 1995 annual report
on Form 10-KSB of Encon Systems, Inc.
Craig J. Delfino C.P.A.
/s/ Craig J. Delfino
North Kingstown, Rhode Island
June 10, 1996
Coopers Coopers & Lybrand L.L.P.
& Lybrand a professional services firm
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in the Amendment to Form 10-KSB dated April 16, 1996
of our audits of the financial statements of Kemper Management Services, Inc. as
of December 31, 1994 and 1993, and for the years ended December 31, 1994 and
1993.
We also consent to incorporation by reference in the registration statements of
ENCON Systems, Inc. on Form S-3 (File Nos. 33-81756 and 33-88118) and on Form
S-8 (File No. 33-93262) of our report dated April 15, 1995, on our audits of the
financial statements of Kemper Management Services, Inc. as of December 31, 1994
and 1993, and for the years ended December 31, 1994 and 1993.
/s/ Coopers & Lybrand L.L.P.
Hartford, Connecticut
June 10, 1996
